1984 (11) TMI 89 - AT - Income Tax

Additional Tax Assessment Year Distributable Income Income Tax Previous Year Undistributed Profits

Summary

Issues:
1. Application of section 104 of the Income-tax Act, 1961 on a private limited company.
2. Determination of distributable income for declaring dividends.
3. Interpretation of sections 104 and 109 of the Act.
4. Justifiability of additional income-tax under section 104(1).
5. Consideration of actual distributable income versus assessed income.

Analysis:

The judgment by the Appellate Tribunal ITAT Bangalore involved an appeal against an order passed under section 104 of the Income-tax Act, 1961. The case concerned a private limited company that had made a book profit but had no distributable income for declaring dividends due to previous losses. The Income Tax Officer (ITO) added back an expenditure to the income, resulting in a determination of distributable income for imposing additional income-tax. The Commissioner (Appeals) upheld this decision, rejecting the assessee's argument that section 104 should not apply when there was no actual distributable income.

The crux of the issue revolved around the interpretation of sections 104 and 109 of the Act. Section 109 defines distributable income based on gross total income, while section 104 allows for additional income-tax if dividends declared are less than the statutory percentage of distributable income. The Tribunal acknowledged the technical correctness of the ITO's computation but emphasized the spirit of the law. It noted that artificially increasing the income for tax purposes, when the company had no actual distributable income, went against the intention of section 104.

The Tribunal highlighted that the satisfaction required under section 104 should consider the practicality of distribution. Imposing additional tax on a company for not distributing income that never existed in reality was deemed unjust. The Tribunal referenced Supreme Court precedents emphasizing that the purpose of section 104 was to prevent companies from retaining surplus profits. In this case, as the company had no distributable income to distribute, enforcing an additional tax burden would be unreasonable.

Ultimately, the Tribunal allowed the appeal, canceling the order passed under section 104. This decision was based on the principle that imposing a tax on a company for not distributing income that was never available for distribution was unjust and contrary to the spirit of the law. The judgment underscored the importance of considering the practical realities of a company's financial situation when applying tax provisions related to distributable income and dividends.